AJ Bell pensions expert Tom Selby compares this savings wrapper to a SIPP
Thursday 30 Jan 2020 Author: Tom Selby

I’ve been saving in a SIPP but wanted to know if the Lifetime ISA is worth considering for some of my retirement money (I already own a house)? I’m paying in about £5,000 a year so far and receiving 40% tax relief (20% automatically and 20% through my tax return).


Tom Selby, AJ Bell Senior Analyst says:

A pension and a Lifetime ISA both offer incentives in return for saving for the long-term.

Most people can save up to £40,000 a year in a SIPP, with £32,000 of this amount coming from you and £8,000 added via basic-rate tax relief paid at 20%. So for every £80 you pay in, your provider will add an extra £20 automatically.

Your annual contributions are also restricted to 100% of your UK earnings, while your allowance might be lower if you have accessed taxable income from your pension or you have an income of £150,000 or more. You can read more about the annual allowance here.

If you’re a higher (40%) or additional (45%) rate taxpayer you can also claim back an extra 20% or 25% respectively in tax relief via your tax return. That means a £100 contribution to a SIPP will only cost £60 to a higher-rate taxpayer, and £55 to an additional rate taxpayer.

Your investment returns and dividends are tax-free, and you can then access your fund from age 55 (this is scheduled to rise to 57 by 2028). You can then access up to 25% of your fund tax-free, with the rest taxed in the same way as earned income.

The Lifetime ISA offers the same upfront savings bonus as a SIPP, but with a maximum personal contribution of £4,000 a year. This is then topped up by 25% to a maximum of £5,000, meaning a basic-rate taxpayer gets the same bonus as they would via tax relief in a SIPP.

Only those aged 18 to 39 can open a Lifetime ISA, and you will only receive the 25% top-up until you reach your 50th birthday.

Investment growth is tax-free, just like a SIPP, but you can also access your fund tax-free from age 60 or use the money to buy your first home provided it is valued at £450,000 or less.

You have the option of withdrawing money in other circumstances, although the Government will levy a 25% penalty which means you might get back less than you originally put in.

As you are already a homeowner you won’t be able to withdraw money tax-free from a Lifetime ISA to buy a property.

When it comes to retirement saving, as a higher-rate taxpayer it’s likely that you’ll get the biggest bang for your buck from a pension as you qualify for extra tax relief (and therefore a bigger savings bonus). However, if you have used up all your pension allowances in the current tax year – or maxed out your lifetime allowance – it might be worth considering if you have spare cash to save for the long-term.

Lifetime ISAs do not qualify for a matched contribution from your employer in the same way as workplace pensions. If you are in receipt of means-tested benefits, saving in a Lifetime ISA could affect these entitlements while a workplace pension will not.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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